Inaccuracies In Tax Returns: A Question Of Attribution
A welcome win for the tax payer against personal liability notices (PLNs) emphasises that HM Revenue and Customs must prove inaccuracies in tax returns were deliberate in order to impose a penalty.
But the case1 is also a reminder that caution must be applied when preparing tax returns and accompanying documents to avoid the risk of any errors or inaccuracies attracting the attention of HMRC in the first place: it could prove costly.
What happened?
The two directors of an umbrella company provided its own staff to other employment businesses in various sectors. The company submitted different types of returns for several tax years and HMRC opened an investigation into four of them. It decided that the company had failed to provide enough information to support expenses claims (and that the vast majority were in fact inflated or false); and the hours worked were significantly more than those recorded by the company.
HMRC took the view that the company had submitted those documents knowing they were inaccurate and that the company had concealed those inaccuracies. The directors were each issued with a PLN for £5,322,918.45 by HMRC under para 19(1) Sch 24 of the Finance Act 2007.
At issue was whether there were inaccuracies in the company’s tax returns and, if so, whether they were deliberate. The directors denied they had been dishonest and said any deliberate inaccuracy could not be attributed to them.
It was also argued (among other issues) that HMRC’s decision-making process was flawed as it failed to give the company and one of the directors time to respond to the allegations or to set out other matters relevant to the decision to impose the penalties.
The tribunal found that while there were inaccuracies, they were neither deliberately included nor concealed. While both the directors had relevant knowledge as to the hours worked and both had the means of obtaining additional information from clients about HMRC’s concerns and did not do so, the inaccuracies were not deliberate; nor were they concealed.
Furthermore, HMRC had not established that these resulted in an understatement of the amount of tax assessed in the assessment (which resulted in the issue of the PLNs).
Key takeaway
The decision provides the tax payer with a measure of reassurance – that HMRC must demonstrate any inaccuracies were deliberately stated in tax returns before issuing a PLN. That said, company directors need to take precautions when completing their returns to ensure the information provided is as accurate and correct as they can.
If you have any concerns, always take specialist tax advice.
1Sharon Suttle and another v HMRC [2023] UKFTT 873
If you would like us to cover an issue in the next NGM Tax Law Newsletter, we would be pleased to